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Originally Posted by O.A.F.K.1.1
It seems pretty self explanatory, not sure I can simplify it anymore.
Maybe go back and read the post on crowding out.
Ill try tho:
Crowding out = if banks lend to much to Guberment, they wont want to lend to private industry.
But, if the Labour government was borrowing too much in the boom, this would suggest crowding out as an concept is false, as how do you have a private sector borrowing binge like you did in the run upto 2008, if the government is borrowing too much?
Sorry this going to be very long.
I mean, it is very tough to find useful data for crowding out because you want to study situations where the spending happens in an economy that is not in a recession and historically that's where a lot of spending happens so you're never sure of hat you're seeing or if the data is lying to you. But I've found this:
https://ideas.repec.org/p/nbr/nberwo/7269.html
I haven't read past the abstract yet which notably states:
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The results consistently show positive government spending shocks as having a positive effect on output, and positive tax shocks as having a negative effect. The multipliers for both spending and tax shocks are typically small. Turning to the effects of taxes and spending on the components of GDP, one of the results has a distinctly non-standard flavor: Both increases in taxes and increases in government spending have a strong negative effect on investment spending.
(emphasis mine)
Crowding out is not only for when public spending is financed by borrowing, I found this but I've only read the intro and it's only tangentially related to our question but it might help:
http://www.people.hbs.edu/cmalloy/pdffiles/envaloy.pdf
They use situations where there is higher spending in a given state in the US (which correlates very well with a change of chairman in a Senate committee with lots of increases of spending in the state of the chair man woman which btw how confident does that make you about the success of large public spending?) to look at how the private sector reacts:
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Does public sector spending complement or crowd out private sector economic activity? This question, which has occupied economists for much of the past century, remains largely unresolved. Keynesian and neoclassical macroeconomic theories reach strong and generally conflicting conclusions regarding the ability of public spending to stimulate the private sector. A major obstacle limiting empirical progress on the topic is the difficulty
in identifying changes to government spending that are truly exogenous.
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Our key innovation is to use changes in congressional committee
chairmanship as a source of exogenous variation in state-level federal expenditures. We show that becoming a powerful committee chair
results in a significant increase in federal funds flowing to the ascending chairman’s state.[...] Thus, a congressman’s ascension to a powerful committee chair creates a positive shock to his or her state’s share of federal funds that is virtually independent of the state’s economic conditions.
Here's the kicker:
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Our empirical results support the predictions of the neoclassical model. Focusing on the investment (capital expenditure), employment, R&D, and payout decisions of these firms, we find strong and widespread evidence of corporate retrenchment in response to government spending shocks. In the year that follows a congressman’s ascendency, the average firm in his state cuts back capital expenditures by roughly 15%.
These firms also significantly reduce R&D expenditures and increase payouts to their investors. The magnitude of this private sector response is nontrivial: in the median state (which receives roughly $452 million per year in increased earmarks, federal transfers, and government contracts as a result of a seniority shock), capex and R&D reductions total $48 million and $44 million per year, respectively, while payout increases total $27 million per year
But crowding out doesn't only necessarily work the way I thought it did because:
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Thus, our approach identifies a distinct and alternative mechanism by which government spending deters corporate investment. In particular, we provide evidence that crowding out occurs through factors of production including the labor market and fixed industrial assets. These findings argue that tax and interest rate channels, while obviously important, may not account for all or even most of the costs imposed by government spending. Even in a setting in which government spending does not need to be financed with additional taxes or borrowing, its distortionary consequences may be nontrivial.